Now that J.C. Penney Co. Chief Executive Officer Mike Ullman has slowed the sales decline and amassed enough cash to fund two years of operations, he faces his biggest challenge since returning as CEO: a holiday season marked by price wars and penny-pinching consumers.

Analysts predict that U.S. retailers will discount heavily as they compete for shoppers concerned by joblessness and budget battles in Washington. While J.C. Penney has shored up its operations and finances, Macy’s Inc. (M) and Kohl’s Corp. (KSS) can better afford to cut prices to drive traffic. If Ullman is forced to join the price war, he risks hurting profitability and burning cash at a faster than projected rate.

JCP is continuing to “clear” inventory from the previous management team that will likely weigh on margins in F3Q13, but should position the company well for F4Q13…

We are maintaining our BUY ratings on all bonds maturing beyond 2015 at the prices shown in
Figure 1. We favor the longer-dated bonds trading in the 60s that we estimate could generate 22-29% annualized returns over the next 1-2 years, including current yields of 9-12%. We believe the long-dated bonds may trade up to the low-to-mid 80s as financial performance improves, particularly in 4Q and F1H14 against very easy comparisons.

Significant debt and cash burn erodes residual value to the shares, in our view. While we anticipate financial results to improve significantly over the next few years, increased debt levels associated with cash burn is not sufficient to justify the current share price, in our view. Our price target of $5 assumes EBITDA recovers to nearly $800mn (5.7% of sales, down from our previous estimate of $894mn) in FY15 and is valued at 50% of revenues and nearly 8.5x EBITDA. Macy’s, which has demonstrated strong execution, generates an EBITDA margin over 13%, and has manageable debt, trades at just 5.5x the mean consensus EBITDA estimate in FY15.

Shares of JC Penney have dipped 0.6% to $7.92 at 11;08 a.m. today, while Macy’s has fallen 2% to $42.35 and Kohl’s is off 1.6% at $50.99. Sears Holdings (SHLD) has declined 1% to $54.71.

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OCTOBER 11, 2013 11:55 A.M.

Kathy wrote:

The gay and lesbian mothers and fathers day ads killed JCP. I noticed that their spokesperson Ellen isn't in any of their new ads.

OCTOBER 11, 2013 1:16 P.M.

Mary wrote:

This will be the 5th Christmas that I won't be able to buy gifts for my kids. They're adults, but it still bothers me!

OCTOBER 11, 2013 1:17 P.M.

Jeff wrote:

Buy long dated bonds on a firm that is struggling to make it for the next 2 years. Thats simply gambling. geez. But I do wish the company luck!

OCTOBER 11, 2013 6:51 P.M.

Ann wrote:

I miss catalog shopping so much. As I get older, it is harder to get to the Mall to shop. For years I have bought clothes, curtains, bedspreads and other items for my home. Even stools, and wall décor. As well as gifts that were always welcomed. Now I'm told to order online. For the last two years I've had to return all curtains and drapes that I have ordered online. Never had to before. The selection is just NOT there. I know many people feel the same way of the demise of the catalog. however, I think this is so overlooked when redoing the local store here. It's pretty, but has so much less stuff. Now I am shopping elsewhere. Just a lovely store to walk thru. I would even pay a fair amount to cover the cost of shipping, handling and printing just to have a catalog back.

OCTOBER 11, 2013 7:54 P.M.

Lorraine wrote:

Actually, I think what hurt JCPenney the most was the rabid news coverage. Actually, I hesitate to even call it news. Most people like Ellen DeGeneres and Cover Girl certainly hasn't been hurt by having her as a spokesperson. I walked through Kohl's yesterday and their whole store would fit into the misses department at my local Penney's. The catalog is gone because people wouldn't pay for a paper catalog. How many times did you see stacks of outdated catalogs on the sales counter. They couldn't even give them away. Online can also be updated in moments instead of months.

OCTOBER 12, 2013 1:49 A.M.

CJ wrote:

@"JC Penney’s (JCP) shares have dropped today"

That first line of the article isn't even true. The stock opened higher on the 11th than it did the two days before that, and it closed higher than it has in over 4 days.....

OCTOBER 12, 2013 2:27 P.M.

Danny K. wrote:

Ron Johnson was right about one thing: JCPenney stores are dumps. Even the newest stores look awfully boring. When Kohl's and Target provide better ambiance, you know you have trouble.

OCTOBER 12, 2013 2:33 P.M.

Danny K. wrote:

@Lorraine - "Most people like Ellen DeGeneres"

No Lorraine, most people do not like Ellen DeGeneres because she's not funny, not particularly good looking and most people don't want her agenda shoved in their faces. Lest you think I'm approaching this from the standpoint of being a gay basher, contrast Ellen to someone like the late Paul Lynde: Good looking, extremely funny and although everybody suspected he was gay, we weren't forced to have his lifestyle paraded around us and crammed down our throats.

If Benetton wants to push the gay agenda, it's one thing. But JCPenney is a family store and the seedier side of life needs to be left outside of their advertising.

OCTOBER 12, 2013 2:34 P.M.

Danny K. wrote:

@Lorraine - "Most people like Ellen DeGeneres"

No Lorraine, most people do not like Ellen DeGeneres because she's not funny, not particularly good looking and most people don't want her agenda shoved in their faces. Lest you think I'm approaching this from the standpoint of being a ghay hater, contrast Ellen to someone like the late Paul Lynde: Good looking, extremely funny and although everybody suspected he was ghay, we weren't forced to have his lifestyle paraded around us and crammed down our throats.

If Benetton wants to push the gay agenda, it's one thing. But JCPenney is a family store and the seedier side of life needs to be left outside of their advertising.

OCTOBER 12, 2013 2:35 P.M.

Danny K. wrote:

@Lorraine - "Most people like Ellen DeGeneres"

No Lorraine, most people do not like Ellen DeGeneres because she's not funny, not particularly good looking and most people don't want her agenda shoved in their faces. Lest you think I'm approaching this from the standpoint of being a ghay hater, contrast Ellen to someone like the late Paul Lynde: Good looking, extremely funny and although everybody suspected he was ghay, we weren't forced to have his lifestyle paraded around us and crammed down our throats.

If Benetton wants to push the ghay agenda, it's one thing. But JCPenney is a family store and the seedier side of life needs to be left outside of their advertising.

OCTOBER 12, 2013 4:00 P.M.

Same old song wrote:

Ah, Ronnie Johnson mother most be so proud. A true example of massive, huge ego, from a guy that fell in love with himself at an early age. I always worry about CEOs, honchos, who dress and try to look 20 years younger or so up for a million dollar job in a sweater, open shirt, knowing he most likely would never set foot in the store they were from. The only thing missing from old, my way or the highway Ronnie was cowboy boots.
warning to employees, red flag, these guys are never "your friends".

What the f is all this gay bashing, gee give it a damn rest, me thinks you protest too much.
Take a hard look at most of those clothes designers.... If you have that big of issues with gays, aka Kathy , you should join a nudist colony. gee, life is too short for this deep seated hate,my guess another Christian considerate value, one does learn to hate at an early age, ah gays people you just "love" to hate.. What would you do with your life if not being able to B&M about them, find another group for your hate? I could not care less aboy "gays", doesn't break my leg or pick my pocket. Want something to bitch about, how about the $1,000 per month for health care I pay, or most people can not retire with a middle class job, including school teaches with 4 plus expensive college at age 70. Well you can retire just give up health insurance or food/shelter. Work until you drop. Know two college professors in this group, you going to miss that employer's share and you get hit via of the full premium.

The point is the world/US is bubbling with enough more high priority problems then seen in your little horse blinder world.

I feel sorry for those little investors, not Ackman, in this public company that have taken a beating. A corporate raid, in this case rape, of an ICON American store. pure greed was the reason by Ackman, greed and entitlement, another treasured value by some. You should be up in arms demanding Congress to put in pace some poison pill which would be applied automatically to all US public companies to stop this "take" over by a group holding what 17 percent of the shares. A 100 year old US company ruined in less then two,years, amazing.

OCTOBER 12, 2013 4:36 P.M.

Danny K. wrote:

@Same old song - It's one thing if you're gay and if being gay is incidental to what you are primarily known for. I don't know that anybody cares or cared that Elton John and Paul Lynde were gay. Both had talent and that;s why they became successful. As I mentioned in an earlier post, Paul Lynde would be a great spokesperson for a mainstream store. Ellen Degeneres, on the other hand, was a not-funny comedian that would have long faded from the scene if she had not been parading around her lesbianism with Anne Heche. Big difference, IMO.

Again, context is what's missing. If a store with a younger profile wants to advertise gays I don't think anybody cares. But when you're a mainstream store with suburban America as your target customer, I don't think it's a good idea to parade leftist politics in order to make some kind of a statement. Keep your politics to yourself, I just want a deal on a marked down Polo shirt.

OCTOBER 12, 2013 11:56 P.M.

Lorraine wrote:

Did I not just say that I didn't think Ellen had anything to do with jcp's problems. It was the rabidly negative, every single bleeding day, internet news shows. Poorly written and terribly slanted.
Just want to remind you to check the ratings on the Ellen show. Is she popular in your opinion because she is funny or controversial? I find her very entertaining along with most of the rest of America, present company excluded of course. And didn't you say the late Paul Lynde? A dead icon. maybe that could work.

OCTOBER 13, 2013 12:29 P.M.

Danny K. wrote:

@Lorraine - 300 million people live in America. Ellen Degeneres averages less than 4 million per show. If you think that makes her popular, you really need to understand context a little better. Again, Elton John (gay, but known more for being a singer than for being gay), great mainstream spokesman. Likewise Paul Lynde, Rock Hudson, Van Williams, etc. Ellen Degeneres? You may like her but not many people do. See the difference?

(BTW, I know the father of somebody who works on Ellen's show. Ellen is not a nice person.)

OCTOBER 31, 2013 6:08 P.M.

William Hudson wrote:

J.C. Penny's customer base had alway been made up of traditional family oriented people with high moral standards. No one had any problem with someone involved in the debauchery of homosexuality working at a J.C. Penney store or being waited on by someone with that problem. All the customer wants is courtesy and helpfulness from an employee of any organization. However, when J.C. Penney hired as their spokesperson an extreme advocate for the homosexual agenda, they became a defacto advocate, themselves, for the same agenda. That's where we all drew a line and most certainly had an effect on the store's sales. I am personally keeping an eye on what J.C. Penney does in the future in order to decide whether or not I will ever return to what was once my favorite department store.

OCTOBER 31, 2013 6:12 P.M.

Anonymous wrote:

J.C. Penny's customer base had alway been made up of traditional family oriented people with high moral standards. No one had any problem with someone involved in the debauchery of homosexuality working at a J.C. Penney store or being waited on by someone with that problem. All the customer wants is courtesy and helpfulness from an employee of any organization. However, when J.C. Penney hired as their spokesperson an extreme advocate for the homosexual agenda, they became a defacto advocate, themselves, for the same agenda. That's where we all drew a line and most certainly had an effect on the store's sales. I am personally keeping an eye on what J.C. Penney does in the future in order to decide whether or not I will ever return to what was once my favorite department store.

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